Finance & Banking
Last updated: Thursday, May 16, 2013
Lifting Restrictions on Credit GrowthPosted: Tuesday, June 05, 2012
Credit growth is negative in the year to date while there is excess liquidity in the banking system.
Consumer price index (CPI) has continuously declined since March with the monthly growth rate at the lowest point in many years, according to the General Statistics Office (GSO). May CPI rose 2.78 percent over the end of 2011, the lowest in three years. Inflation has been largely curbed. Credit growth is negative in the year to date while liquidity climbed 4.47 percent and total deposits at banks expanded 5.42 percent. Excess capital has driven banks to purchase government bonds although coupon rates are in steep decline.
The current top concern is how to channel bank capital into business operations and ease difficulties facing against the business community and spur economic growth.
Not only rate cuts
The State Bank of Vietnam (SBV) continues advocating rate cut tendency, with deposit rate ceiling lowered to 11 percent per annum from May 28. Many commercial banks immediately launched concessional loans. On May 28, the State-owned Vietnam Bank for Investment and Development (BIDV) announced to reduce short-term lending rates to 12 - 13 percent per annum. Rates for agriculture, rural development, SMEs, supporting industries, exporters and flood-hit borrowers were 13 percent, one hundred percentage points below the ceiling.
Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) applied 13 percent interest rates on personal loans and 14 percent rates on home loans. Four priority fields, namely agriculture, export, SMEs and supporting industries are imposed 14 percent per annum.
Other banks also stepped up the introduction of new lower lending rates to boost up competitiveness as well as beautify their images. In many cases, the announcement of rate cuts only serves PR purposes because very few businesses can access cheap loans. According to the data released by the central bank, in the first 15 days of applying the new lending rate ceiling of 15 percent per annum on four priority fields, many still had to borrow at 18 - 19 percent although official rate announcements mentioned 1 - 2.5 percent higher than concessional rates for four priority fields.
Although a policy has a lag, the State Bank’s prime rate cut of 3 percent in two months show the advocacy of quick rate lowering. And, commercial lenders cannot stand out of the way. This quick move forces them to rethink rate cuts more factually.
Excess cash and difficult lending drove interbank rates to 2.5 percent per annum, the lowest since 2007. Banks are spending their money on government bonds. In May, three bond bidding sessions were successfully concluded with the highest winning rate of only 10.15 percent. On May 25, the Vietnam Development Bank (VDB) sold VND3,100 billion of government bonds with a maturity of three and five years, carrying a coupon rate of less than 10 percent - lower than deposit rate. On May 21, VND2,000 billion worth of bonds were sold out at a yield of 8.9 percent.
Interbank interest rates are in steep decline. And, when interbank rates are too cheap in relation to lending rates, some foreign banks use capital on the secondary market to lend on the primary market. Then, interest rates offered by foreign lenders to loans in local currency will be low, thus forcing domestic banks to consider a broad lending rate cut.
However, exorbitant lending rate is not the only reason for businesses’ inaccessibility to credit sources. Negative credit growth is also attributed to their weak absorption of capital while the room for credit growth averages 2 percent a month from now to the end of this year. Nonetheless, risk management regulations disallow banks to provide subprime loans to boost credit growth. Currently, interest rates tend to decrease but businesses still find it hard to borrow money from banks. For the time being, banks are mixed at lifting restrictions on lending conditions because the move must comply with corporate restructuring and economic restructuring. This is a macro-level quiz.
The SBV has capped lending rate for four priority fields: agriculture - rural development, export, SMEs, and supporting industries. Accordingly, the lending rate is limited at 3 percent from the ceiling deposit rate. These fields reportedly take up 90 percent of bank loans but most of them are disqualified for new loans. Indeed, businesses hardly access such soft loans. Some qualified borrowers do not want more money because of underperformances while near-bankrupt companies are ineligible for loans.
Dr Cao Si Kiem, President of the Vietnam Small and Medium-sized Enterprises Association, said: "To bring rate cut policy to life, banks necessarily impose reasonable borrowing conditions and borrowers essentially strive to meet requirements. Both sides must look into the same direction and share hardships together. If they only run for their own interests, they will be like two people running along two river banks where they never meet.”
Mr Nghiem Xuan Thanh, Deputy General Director of Viet Nam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), said: Interest rates are not as worrying as bad debts. Hence, despite lower interest rates, banks cannot lend if they cannot tackle bad debts.
In the latest move, the SBV allows credit institutions to cross-purchase their debts. Permitted banks trade debts borne to businesses and cross-debts of credit institutions. The central bank also allows banks to restructure and reschedule debts for enterprises, especially unlucky good-performing ones.
If nonperforming loans are not resolved, banks will not lend money. As a result, although they follow the instruction of the regulatory agency, money is still out of reach of businesses. And, the number of dying companies will continue to grow up.